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Forecast: Top 4 Reasons the Markets Could Continue to Rally in 2013

Stocks in this article: ^DJI ^GSPC

By Thomas and Robert Fross, Co-founders

NEW YORK ( Fross & Fross Wealth Management) -- With equities at or near new highs in the first quarter, plenty of analysts say that the markets will run out of steam, as they did in 2011 and 2012. However, we think that the situation is fundamentally different in 2013 and that the markets still have room to run.

Despite some major headwinds from sequestration and the deteriorating situation in Europe, U.S. markets have put up an impressive performance in the first quarter, fueled by liquidity and upbeat economic reports. Earlier this month, the Dow Jones Industrial Average cracked 14,400, while the S&P 500 approached its record close. While you cannot invest directly in an index, and their recent performance does not guarantee their future returns, we are encouraged by this recent action.

Many analysts fear that the rally won't last and that we'll see a repeat of the disappointing mid-year performance of 2011 and 2012. In the short term, we agree that equities may be overbought and investors should expect a little consolidation, but we think there's plenty of room for optimism about the market rally this year.


Here's why:

1. This is one of the most unbelieved rallies we've ever seen, and it has hung in there despite the odds. Retail investors remain skeptical and we think that there's a lot of money sitting on the sidelines.

A look at the Investment Company Institute's statistics on money market accounts tells us that there is still a lot of cash parked in institutional and retail money market accounts that could be injected into equities.

For the rally to continue, retail investors will have to jump in more aggressively, and there's evidence to suggest that some already have. A TD Ameritrade sentiment index shows that retail investors have been buying stocks more assertively than they have in the last three years, and the latest ICI report shows that total money market assets dropped by $16.7 billion, to $2.646 trillion, during the week ended March 6, showing that investors are moving out of cash.

2. Loose monetary policy. This is the rally that Bernanke built and it looks like "QE Infinity" is here to stay. The market has been booming largely because of the concerted efforts of the Fed and central banks around the world to drive growth by forcing down bond yields, pushing return-seeking investors into riskier assets and restoring confidence in the global economy.


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